The order to Shenzhen banks to cap cash withdrawals has highlighted the rampant illicit foreign exchange trade between Shenzhen and Hong Kong, which mainland banking industry sources said had been aided by a mushrooming of illegal money-transfer outlets - and by mainland banks.
The illegal transfers to Hong Kong have been a problem for years, but the outflow of cash turned into a torrent after the central government announced in August that it would let individuals on the mainland invest directly in Hong Kong-listed stocks.
'Tens of billions yuan could be circulating around Hong Kong through numerous underground channels', said Billy Mak Sui-choi, an associate professor of Hong Kong Baptist University's department of finance.
He said that in theory, hot money from the mainland did not physically flow over the border. Investors usually withdrew cash from their bank accounts and took the money to illegal money-transfer outlets in Shenzhen, which would instruct associates in Hong Kong to deposit the equivalent amount in Hong Kong dollars in designated accounts at local brokerages or bank branches on behalf of the mainland investors.
Some mainland investors simply withdraw the cash and carry it over the border, where they deposit it at local brokerages for stock trading, mainland media have reported.
Many of the money-transfer operations in Shenzhen call themselves 'currency exchange shops' or 'trading companies'.
A Beijing-based bank official said some foreign banks on the mainland accepted big deposits of yuan from mainland citizens and then allowed the withdrawal of an equivalent sum in Hong Kong dollars through their Hong Kong branches.